You expected a cut in interest rate, the yield curve will change where short term interest rate will decrease 200bps, medium will decrease 160 bps and long term decrease 150bps. Bond Modified duration Convexity measure A Short 1.3 2 B Medium 6 30 C Long 14 400 The bonds in the table are zero coupon bonds and duration are in years. Portfolio Strategy A: Invest 10m in bond A and 10m in bond c. Portfolio Strategy B: Invest 20m in bond b. Calculate the expected return of each strategy, and explain which strategy should be used to deal with the decrease in interest rate. And does the strategy increase or decrease forward looking tracking error of the portfolio?
You expected a cut in interest rate, the yield curve will change where short term interest rate will decrease 200bps, medium will decrease 160 bps and long term decrease 150bps. Bond Modified duration Convexity measure A Short 1.3 2 B Medium 6 30 C Long 14 400 The bonds in the table are zero coupon bonds and duration are in years. Portfolio Strategy A: Invest 10m in bond A and 10m in bond c. Portfolio Strategy B: Invest 20m in bond b. Calculate the expected return of each strategy, and explain which strategy should be used to deal with the decrease in interest rate. And does the strategy increase or decrease forward looking tracking error of the portfolio?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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You expected a cut in interest rate, the yield curve will change where short term interest rate will decrease 200bps, medium will decrease 160 bps and long term decrease 150bps.
| Bond | Modified duration | Convexity measure | |
| A | Short | 1.3 | 2 |
| B | Medium | 6 | 30 |
| C | Long | 14 | 400 |
The bonds in the table are zero coupon bonds and duration are in years.
Portfolio Strategy A: Invest 10m in bond A and 10m in bond c.
Portfolio Strategy B: Invest 20m in bond b.
Calculate the expected return of each strategy, and explain which strategy should be used to deal with the decrease in interest rate. And does the strategy increase or decrease forward looking tracking error of the portfolio?
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